A recent study compiled by VantageScore® Solutions found that default risk associated with mortgage originations has improved. The likelihood that a borrower will become 90 or more days past due after a mortgage has been originated was 2.5 percent in 2011, far lower than in 2009, where it hovered at 7 percent. Get your VantageScore® credit score. Source: View the complete VantageScore Solutions 2011 Annual Validation study. VantageScore® is owned by VantageScore Solutions, LLC.

The average bankcard balance per consumer rose to $4,359 in Q1 2012 – an 8 percent increase from the previous quarter. The increase resulted primarily from balance increases to VantageScore® A and B segments, which increased 31 percent and 11 percent, respectively. Download the latest Experian industry white papers. VantageScore® is owned by VantageScore Solutions, LLC.

A recent Experian study showed that strategic defaults accounted for 23 percent of all mortgage defaults 60 days past due or greater in Q4 2011. Other findings included the following: Prime and super-prime consumers (VantageScore® credit score A and B tiers) have the highest incidence of strategic default Average outstanding mortgage balances for strategic defaulters are nearly 36 percent higher than their nonstrategic default counterparts. Listen to our recorded Webinar for a detailed look at the current state of strategic default in mortgage and an update on consumer credit trends. Source: Experian-Oliver Wyman Market Intelligence Reports and strategic default studies. VantageScore® is owned by VantageScore Solutions, LLC.  

Up to this point, I’ve been writing about loan originations and the prospects and challenges facing bankcard, auto and real estate lending this year.  While things are off to a good start, I’ll use my next few posts to discuss the other side of the loan equation: performance. If there’s one thing we learned during the post-recession era is that growth can have consequences if not managed properly.  Obviously real estate is the poster child for this phenomenon, but bankcards also realized significant and costly performance deterioration following the rapid growth generated by relaxed lending standards. Today, bankcard portfolios are in expansion mode once again, but with delinquency rates at their lowest point in years.  In fact, loan performance has improved nearly 50% in the past three years through a combination of tighter lending requirements and consumers’ self-imposed deleveraging.   Lessons learned from issuers and consumers have created a unique climate in which growth is now balanced with performance. Even areas with greater signs of payment stress have realized significant improvements.   For example, the South Atlantic region’s 4.2% 30+ DPD performance is 11% higher than the national average, but down 27% from a year ago.   Localized economic factors definitely play a part in performance, but the region’s higher than average origination growth from a broader range of VantageScore® credit score consumers could also explain some of the delinquency stress here. And that is the challenge going forward: maintaining bankcard’s recent growth while keeping performance in check.  As the economy and consumer confidence improves, this balancing act will become more difficult as issuers will want to meet the consumer’s appetite for spending and credit.  Increased volume and utilization is always good for business, but it won’t be until the performance of these loans materializes that we’ll know whether it was worth it.

With interest rates at their lowest level since 2008 and an increasingly competitive market, automotive lenders are increasing their willingness to make loans between six and seven years long: Auto loans of 73 to 84 months accounted for 14.1 percent of all new vehicle loans, up 47 percent from Q4 2010 Auto loans of 73 to 84 months accounted for 9.04 percent of all used vehicle loans, up 41 percent from Q4 2010 View our recent Webinar on the Q4 2011 state of the automotive market. Source: Experian Automotive's quarterly credit trend analysis. Download the quarterly studies and white paper.  

The economy is accelerating at a sluggish pace, and world headlines cause business leaders to swing between optimism and pessimism daily. Risk managers must look more closely and much more frequently at their customers' behavior to stay ahead of emerging credit problems. Some tips: Use all customer information when making decisions. Combining both internal and external data can paint a clearer picture of your customers. Identify the customer relationships that have value and should be retained. Apply resources accordingly. Implement daily triggers so you have the latest customer information around bankruptcy, repossession or loan delinquency, as well as positive information such as payments made to other financial institutions. Spend more time examining consumers who are delinquent on their home mortgage payments to determine their behavior on your portfolio. Use next-generation collections software to keep collectors up to date on account-level strategies. Download our white paper on how changes in the economy have impacted consumer credit behavior and what risk managers should analyze in order to determine portfolio strategies. Source: Experian News

The automotive loan market continued to improve, with lenders showing more willingness to lend outside of prime. In Q4 2011, average credit scores for new and used auto loans dropped when compared with Q4 2010. Additionally, the percentage of loans to customers with nonprime, subprime or deep-subprime credit scores increased. Average credit scores for new vehicle loans dropped six points, from 767 in Q4 2010 to 761 in Q4 2011 Average credit scores for used vehicle loans dropped nine points, from 679 in Q4 2010 to 670 in Q4 2011 New vehicle loans to nonprime, subprime and deep-subprime customers increased by 13.8 percent from Q4 2010 to Q4 2011 View our recent Webinar on the Q4 2011 state of the automotive market. Source: Experian Automotive's quarterly credit trend analysis. Download the quarterly studies and white papers.

Despite low demand and a shrinking pool of qualified candidates, loan growth priorities continue to rank high for most small-business lenders – both for small to midsize banks and large financial institutions. Between 2006 and 2010, overall loan applications were down 5 percent where large financial institutions saw small-business loan applications rise 36.5 percent. Banks and credit unions with assets less than $500 million showed the most significant increase of 65 percent. Read more of the blog series: "Getting back in the game – Generating small business applications." Source: Decision Analytics' Blog: Relationship and Transactional Lending Best Practices

Last month, I wrote about seeking ways to ensure growth without increasing risk.  This month, I’ll present a few approaches that use multiple scores to give a more complete view into a consumer’s true profile. Let’s start with bankruptcy scores. You use a risk score to capture traditional risk, but bankruptcy behavior is significantly different from a consumer profile perspective. We’ve seen a tremendous amount of bankruptcy activity in the market. Despite the fact that filings were slightly lower than 2010 volume, bankruptcies remain a serious threat with over 1.3 million consumer filings in 2011; a number that is projected for 2012.  Factoring in a bankruptcy score over a traditional risk score, allows better visibility into consumers who may be “balance loading”, but not necessarily going delinquent, on their accounts. By looking at both aspects of risk, layering scores can identify consumers who may look good from a traditional credit score, but are poised to file bankruptcy. This way, a lender can keep their approval rates up and lower risk of overall dollar losses. Layering scores can be used in other areas of the customer life cycle as well. For example, as new lending starts to heat up in markets like Auto and Bankcard, adding a next generation response score to a risk score in your prospecting campaigns, can translate into a very clear definition of the population you want to target. By combining a prospecting score with a risk score to find credit worthy consumers who are most likely to open, you help mitigate the traditional inverse relationship between open rates and credit worthiness. Target the population that is worth your precious prospecting resources. Next time, we’ll look at other analytics that help complete our view of consumer risk. In the meantime, let me know what scoring topics are on your mind.

The strongest growth in new bankcard accounts is occurring in the near-prime and subprime segments of VantageScore® credit score C, D and F. Year-over-year (Q1 2011 over Q1 2010) growth rates of 20 percent, 46 percent and 53 percent were observed for each of the respective tiers. Listen to our recent webinar featuring bankcard credit trends Source: Experian-Oliver Wyman Market Intelligence Reports

The Consumer Financial Protection Bureau (CFPB) now has the ability to write and enforce 18 consumer protection laws that guide financial products and services. The new regulator has signaled the following issues as priorities: Clarity on how credit scores affect lender decisions: Beginning July 21, 2011, lenders were required to disclose the credit score that they used in all risk-based pricing notices and adverse action notices Shorter and simpler consumer disclosure forms: One of the first priorities is to make the terms and conditions associated with purchasing a mortgage or applying for a credit card shorter and clearer Enforcing the Fair Debt Collection Practices Act: The CFPB will enforce the Fair Debt Collection Practices Act and review current debt collector practices Learn more about the CFPB  

  Auditing provides the organization with assurance that all financial controls are in place to ensure that trust account funds are maintained, access to financial records at the vendor location is tightly controlled, customer data is secure, and that the vendor is in full compliance with contractual requirements (i.e., minimum account servicing requirements for issues such as vendor actions following initial placement, ongoing contact efforts, remittance processing, settlement authorizations, etc.). There are two basic auditing processes that occur from a best practices perspective. The first one is fairly common, and involves use of an on-site audit. Onsite Auditing The onsite audit is required to examine financial records involving customer transactions, accounting processes, trust accounts and remittances, IT and security for handling sensitive customer information and records, and documentation of the processes that have occurred towards customer communication, contact efforts and results. There are differences of opinion as to both the frequency of onsite audits, and whether they should be announced or unannounced. Frequency is primarily an issue of the size of the overall vendor relationship and the degree of financial risk associated with a default, typically involving the trust account and legal exposure to litigation and brand reputation risk. Most utilities should follow an annual onsite audit schedule due to size of portfolio and attendant financial exposure. While surprise audits have the advantage of reducing any opportunity by the vendor to potentially alter records to cover up what would normally be audit violations, it does result in a more time-consuming audit schedule onsite, as the vendor is unable to prepare and have documentation available. The use of substantial online documentation lessens this issue, but nonetheless, there is more work to do onsite when nothing has been captured for review in advance. The other issue is that key managers from the vendor may not be available on the dates of a surprise audit. One way in which organizations chose to resolve the issue of surprise versus planned audit is to conduct one pre-planned and announced audit annually, and a smaller scaled unannounced onsite audit annually at least 2 quarters separated from the planned audit. The use of remote auditing and monitoring lessens the requirements for onsite audits in certain areas, other than IT / Security, financial and compliance. Remote Auditing / Monitoring Remote auditing and monitoring of vendors is a stronger tool for credit grantors to improve performance of agencies, in that it combines some of the same auditing checks to ensure compliance and quality of collections with an added value of focus on performance. The best tool in the arsenal is the use of digital logging to capture the collection call between the vendor and customers. When digital logging technology first came into use, it was cost prohibitive for collection agencies, and not fully accepted by the industry due to its possible use in litigation against the agencies. Over the past decade, as the costs of deployment have lessened, and agencies became more attuned to customer satisfaction and full FDCPA compliance, more agencies have installed digital logging into their call centers. Most agencies that utilize digital logging capture every customer contact effort that results in either a right party contact, or third party contact for messages, etc. Many of those agencies will tag each of these voice records as to whether they were a right party contact or not. The intent is to be able to audit more frequently those calls that were right party contacts, so that collector skills can be assessed in terms of how they managed the customer, their ability to create and sell payment solution, and ability to negotiate successfully with the customer. Typically, an organization that is using digital logging will have an internal quality assurance team that will create a compliance audit process that establishes a number of right party and non-right party contacts per collector. These calls are typically evaluated using a scorecard approach, and used for training purposes. They might alter the frequencies of monitoring based upon the tenure of the collector, their performance levels, and the results of prior monitoring, such that sample sizes are affected. Utilities and other credit grantors should have access to the entire inventory of raw digital log files for their projects and randomly audit them remotely. These should not be “assembled” or pre-selected by the vendor, so that there is no undue influence in deciding which calls / collectors to review. If the vendor is using a QA monitoring / compliance program and separately maintains a scorecard driven monitoring process, the credit grantor should have access where those calls and evaluations related to their own customers and contacts. The intent of the process is to listen for both quality of the communication with the customer from the perspective of effectiveness, but also to ensure compliance with FDCPA and that the customer was treated with respect and appropriately. Typically, a credit grantor would establish a remote monitoring schedule where x calls across the agent pool handing their assigned portfolio are monitored and evaluated with a simple checklist. Ideally, the credit grantor should be listening to a range of 100-150 right party contacts per month, based upon overall inventory and activity, but typically no more than 1-2% of the total right party contacts per month on their customer accounts. The credit grantor should provide monthly feedback to the agency regarding the monitoring of quality and compliance, noting any compliance or policy violations, and any concerns relating to customer contact quality and performance. Other aspects of the remote auditing that occurs each month should include ensuring that all servicing requirements are met. As an example, we would expect that the agency should perform various external checks for bankruptcy, deceased, etc. before initiating contact once the file has been received from the credit grantor as a placement. These database checks should be performed within the first 24 hours once placed, and then a letter of representation should be sent to those not flagged. The initial call to the customer should also occur within 24-48 hours from placement by the credit grantor, subject to phone number availability. Skip trace processes should commence immediately on those without phone numbers. There are requirements for how often accounts are attempted for contact, and settlement authorizations. All of these requirements are subject to the remote monitoring that is performed to ensure these are met.    Coming soon...  Best practices for improving agency performance.

Even as interest rates remain at near-record lows, mortgage originations declined for the second quarter in a row in Q2 2011 to $268 billion, a 19 percent decline over the previous quarter. Refinance activity that spurred originations in 2010 has not been as prevalent this year. Listen to our recent Webinar on consumer credit trends and retail spending. Source: Experian-Oliver Wyman Market Intelligence Reports.  

By: Mike Horrocks Henry Ford is credited to have said “Coming together is a beginning. Keeping together is progress. Working together is success.”   This is so true with risk management, as you may consider bringing in different business units, policies, etc., into a culture of enterprise risk management.  Institutions that understand the concept of strength from unity are able to minimize risks at all levels, and not be exposed in unfamiliar areas. So how can this apply in your organization?  Is your risk management process united across all different business lines or are there potential chinks in your armor?  Are you using different guidelines to manage risk as it comes in the door, versus how you are looking at it once it is part of the portfolio, or are they closely unified in purpose? Now don’t get me wrong, I am not saying that blind cohesion is right for every risk management issue, but getting efficiencies and consistencies can do wonders for your overall risk management process.  Here are some great questions to help you evaluate where you are: Is there a well-understood risk management approach in place across the institution? How confident are you that risk management is a core competence of your institution? Does risk management run through the veins of the institution, or is it regarded as the domain of auditors and compliance? A review of these questions may bring you closer to being one in purpose when it comes to your risk management processes.  And while that oneness may not bring you Zen-like inner peace, it will bring your portfolio managers at least a little less stress.

VantageScore® Solutions LLC polled risk professionals about how they are measuring score performance, and 60 percent of respondents said they are now using metrics beyond the Kolmogorov-Smirnov (KS) statistic value. One new metric is score consistency, which is defined as the ability to provide near-identical risk assessment of a consumer across multiple credit reporting agencies. In other words, this means having confidence that when a consumer gets a 700 from one agency, he or she is likely to get a 700 from another agency. The other metric that risk managers referenced was stability, which is defined as the ability of a model to retain its predictive accuracy across an extended time frame. Learn more about the VantageScore credit score® Source: VantageScore newsletter, April 2011 VantageScore® is owned by VantageScore Solutions, LLC